Do you have stock options that have grown to be a large position of your portfolio? Are you consolidated in a few investments?
In this episode of Steve’s Stock Stories, Steve Wolff and Greg Carroll, CFP® discuss a couple examples of concentration risk and some misconceptions about this type of risk. Within 15 minutes, learn about what concentration risk is, how it can occur, and how diversification may minimize some of this risk.
FREE Report: 5 Investing Secrets Every Investor Needs to Know
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
Don’t let reading a long and complex investment book stop you from understand bonds and how they can be affected. Steve Wolff (Founder and Managing Partner) and Greg Carroll, CFP® discuss their experiences during the 2008 Market Collapse and how not just the stock market and housing markets were affected but also the bond market.
__________________________________
FREE Report: 5 Investing Secrets Every Investor Needs to Know Avoid making bad investment decisions, this little-known report reveals 5 better ways to invest in stocks.
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
__________________________________
Full transcription below:
Steve Wolff:
Hello, once again, this is Steve Wolff. And we’re ready for another episode of Steve Stock Stories, which are becoming pretty popular these days, surprisingly. Anyway today, we’re going to deviate a little bit from what we normally do. Normally we talk a little bit about stocks, hence Steve Stock Stories. However, we’re actually going to talk a little bit about bonds today because I’ve got Greg Carroll with me, who someone I’ve known for quite a number of years. We worked together, I think we started … what was it? Shearson Lehman or something.
Greg Carroll, CFP®:
Yeah, something like that.
Steve Wolff:
You’ve been in the business since, what? 1994.
Greg Carroll, CFP®:
Yes, sir.
Steve Wolff:
I’ve been in the business since 1986. So we’ve seen a lot of things happen. We’re going to talk a little bit about what happened in the 08 timeframe. Because everyone talks about how stocks are really risky and everything else. And people never really realize the risk that you can have in a bond. Before we get to the story and before we get to you, Greg, I have to have a little disclaimer here, otherwise the lawyers will chop my you know what’s off. And we don’t want that to happen.
Steve Wolff:
This whole Steve Stock Stories is just for informational purposes only. It’s not meant from one specific person or what they have in their portfolio. If you’ve got something that … any questions about what we’re saying, talk to your financial advisor or talk to your tax person or whoever it might be, who you talk with. Before you buy anything that we’re talking about. All right? So now that we got that out of the way, Greg Carroll, it’s nice to see you.
Greg Carroll, CFP®:
Good to see you, Steve.
Steve Wolff:
Yeah, I mean, we worked together at Shearson Lehman for, I don’t know how many years. Before you went off on your own.
Greg Carroll, CFP®:
Yes. I think about seven years.
Steve Wolff:
Seven years. Wow.
Greg Carroll, CFP®:
Yeah.
Steve Wolff:
Then Greg came back to us, what? Two years ago now?
Greg Carroll, CFP®:
Two and a half years ago.
Steve Wolff:
All right. So we’ve been working together for quite a number of years. At any rate, Greg, I know when you and I talked about what happened in the 08, 09 timeframe, 07. When they look like the banks were going to collapse. Talk a little bit about what happened to some of the bonds that you … or just tell us the story.
Greg Carroll, CFP®:
Okay. The good thing here, as far as your disclaimer goes, you can’t buy what we’re going to talk about because it’s no longer in existence. What we’re going to talk about is bonds that we purchased for our clients back in 2007 timeframe and they were the Lehman Brother bonds. They were A-rated, high quality bonds that you really wouldn’t expect to ever lose any money with.
Steve Wolff:
A rated, basically, for those who don’t know means what?
Greg Carroll, CFP®:
Well, you’ve got a bond rating scale, which starts at AAA rated. Government bonds would be considered AAA rated, all the way down to A, B and even C and below is junk bonds. These are pretty high on the ladder there.
Steve Wolff:
They’re pretty high quality.
Greg Carroll, CFP®:
Yeah. Anything with an A, A plus, double A rate is high investment grade bonds.
Steve Wolff:
Okay.
Greg Carroll, CFP®:
You’re just going to buy those, collect your coupon, your semi-annual interest payments, until it matures and you get your money back. But we ran into this thing called a great financial crisis. A lot of things happened in the financial services industry. One of which was the bond rating services, Moody, Standard & Poor’s. I can’t remember if Duff & Phelps does bonds or if it’s more real estate. But they’re the ones that actually give these ratings to certain bonds.
Greg Carroll, CFP®:
Apparently they weren’t doing their homework well enough to actually understand what some of the bonds; what the real risk was in those bonds. The way the financial services industry was evolving, they didn’t understand how intertwined globally some of these banks and financial services companies were with different aspects all around the globe. There was a kind of a kink in the armor early that year in February, I think when Bear Stearns ran into some trouble. Didn’t raise a lot of red flags, but a few people started to notice. Then later that summer … what was the treasury secretary’s name back then?
Steve Wolff:
You’re trying my-
Greg Carroll, CFP®:
Geithner? Anyway-
Steve Wolff:
I don’t know.
Greg Carroll, CFP®:
Very smart young fellow.
Steve Wolff:
It was Geithner, actually.
Greg Carroll, CFP®:
Something like that. He was a very smart individual.
Steve Wolff:
I can’t remember what I had for breakfast this morning. You asked me about 20 years ago or however long it was.
Greg Carroll, CFP®:
That was a long time ago. Anyway, he realized there was some serious issues with a lot of the big banks and they had to call an emergency meeting with the treasury, the heads of all the banks, JP Morgan, Bank of America, Merrill Lynch, all of them.
Greg Carroll, CFP®:
But apparently Lehman Brothers was the one bank that may have been the most leveraged and the most in trouble during a financial Blacks Swan event.
Steve Wolff:
And by leverage…
Greg Carroll, CFP®:
Well, it means that for every dollar of assets they took in, they were investing 40 times that.
Steve Wolff:
I heard it was even higher than that.
Greg Carroll, CFP®:
Yeah.
Steve Wolff:
I heard it was something like 80 times.
Greg Carroll, CFP®:
Yeah. It was astronomical.
Steve Wolff:
Right.
Greg Carroll, CFP®:
It should never have been that high. I don’t know if it was public knowledge how levered they were.
Steve Wolff:
Right.
Greg Carroll, CFP®:
So they were kind of the sacrificial lamb at one point in September. I remember talking to one of the large wire-house firms that my partners and I worked at. I called them early, about a week out from them going bankrupt, Lehman Brothers-
Steve Wolff:
When you’re talking about the wire-house firms, you’re talking about the well known companies, I don’t know specifically. But the Merrill Lynches, the UBS’s, the Morgan Stanley’s et cetera, et cetera.
Greg Carroll, CFP®:
Correct, correct.
Steve Wolff:
Okay.
Greg Carroll, CFP®:
I started noticing the prices come down on these bonds, that bonds are priced at a hundred is par value. That’s what you buy them at when they’re issued and that’s what they mature at. Based on a hundred, sometimes they go down to the mid nineties, maybe, up to 105 based on the interest rate environment. But these things were going down big.
Steve Wolff:
The bonds really are priced much like a certificate of deposit is, CD at a bank. You buy X amount of dollars worth, and let’s say you buy $10,000 worth of a CD. You get your interest payments along the timeframe that the CD lasts. When it matures, you get your $10,000 back or whatever that amount is.
Greg Carroll, CFP®:
Right.
Steve Wolff:
So supposedly it’s similar to a bond. Isn’t that how it works?
Greg Carroll, CFP®:
Very similar. Yes.
Steve Wolff:
Okay. So, go ahead.
Greg Carroll, CFP®:
So I noticed these bonds, the price was falling dramatically. I mean, they were at like 70 cents on the dollar a week out from the actual bankruptcy. I didn’t know how to call my clients tell them I have an A-rated bond that seems to be in trouble, but we can maybe get 70 cents on the dollar. I was calling for advice back to New York, the people that are supposed to be helping us kind of collaborate on these types of issues.
Steve Wolff:
This is with the firm you’re with.
Greg Carroll, CFP®:
This is with the firm. And they told me, “No, Lehman Brothers is going to be okay, it’s going to be okay.” I said, “All right.” They get paid a lot of money to tell me that kind of advice. Later in the week, though, the price was down to 60 cents on the dollar. I didn’t know what to do, so I called New York again. They told me the same thing and I said, “I am hearing that Lehman could go bankrupt.”
Greg Carroll, CFP®:
With a bond holder, it works a little different than a stock where dependent on … there’s a lot of different levels of bonds in every corporation. There’s senior secured, senior unsecured, and then a bunch of subordinated debt. So depending where you’re at on that hierarchy in a bankruptcy, you might get 10 cents on the dollar, 20 cents, 30 cents in a bankruptcy scenario. These were senior unsecured debt. I was saying, I just didn’t know that I want to hold onto these. They talked me into holding on. And the news came out over the weekend, that Lehman was going to go bankrupt. So on Monday morning that caused a major onslaught in the stock market. I mean, just the ramifications were far and wide. I mean, it was-
Steve Wolff:
And of course, all this was precipitated by what happened in the real estate market.
Greg Carroll, CFP®:
Yes. That was a big catalyst to it. Yes.
Steve Wolff:
Yeah. I mean, this was that movie, I don’t know what the name of the movie was.
Greg Carroll, CFP®:
The Big Short.
Steve Wolff:
Yeah. It was that at The Big Short where this one particular person at … I don’t remember what institution he was at. But, he actually did some research into what was going on because everybody seemed to be getting a loan, no matter how much you made. I mean-
Greg Carroll, CFP®:
Right.
Steve Wolff:
A guy was making $30,000 a year and he was getting a $600,000 house. He knew something had to be wrong. So when he went out to investigate all of that, he realized that these places where they couldn’t afford them.
Greg Carroll, CFP®:
Right.
Steve Wolff:
Okay. And all these mortgages, they were underwater.
Greg Carroll, CFP®:
And a lot of those houses were just empty.
Steve Wolff:
Absolutely. So that caused all these people … especially the ones who were leveraged. And leveraged, let’s go back to stocks for just a minute. Leverage is the thing that really can kill you.
Greg Carroll, CFP®:
Yes.
Steve Wolff:
In the 1929 stock market crash, it’s exactly what happened. Individuals were buying three and four and five times and maybe more of what they actually had the cash to buy. It was legal. Well, when things went down, they had to come up with money because they were borrowing it and they had to come up to pay off the debt. Well, to pay off five times what you had when you didn’t have that to begin with and everything’s crashing around you, that’s what happens in stocks. Well, the same thing can happen in bonds. And that’s exactly what was happening right?
Greg Carroll, CFP®:
Right. Yes. So, I think one thing that the financial crisis did do, it did kind of clean up the system a lot, the bond rating agencies are doing a much better job. The banks are in much stronger position, I think-
Steve Wolff:
Today.
Greg Carroll, CFP®:
Today. So when you buy an A rated bond today, again, you can feel very confident that that bond should come to maturity and get all your money back. You should have a lot more confidence, but you got to know that things can happen with a company. Not necessarily with the market or the economy as a whole, but a company could have their own Black Swan event. Which could cause it to be downgraded and then you do lose price.
Steve Wolff:
Any company can have an issue. If they do have an issue, then your bond … let’s say they’re going bankrupt, like you said. It can happen to any company. Then your bonds are not going to be worth a whole lot. I mean, I don’t think a Sears bond was worth a whole lot at the end.
Greg Carroll, CFP®:
Right
Steve Wolff:
So, that can happen. I guess the point, again, is that it can happen in stocks or bonds. So you have to really know what it is that you own.
Greg Carroll, CFP®:
Right.
Steve Wolff:
There’s a big difference between buying a company, like, let’s just say Johnson and Johnson. By the way, you can buy that today, but don’t buy it just what we’re saying. But there’s a big difference between a Johnson and Johnson and XYC biotech company.
Greg Carroll, CFP®:
Right. Yeah.
Steve Wolff:
But back then, it’s funny, I had a very similar experience to what you’re talking about when I had the Lehman bonds. Fortunately, I didn’t have it for a lot of people. But I had the Lehman bonds and it looked like things were going bad. Of course, I called our big wigs in New York and they said, “Oh, no, no, no. Everything’s going to be just fine.” Well, I listened to them, unfortunately. Unfortunately it was a learning experience for me and for my clients. But it was not easy to tell a client, “Hey, you’ve got a bond here that you’re pretty sure is going to be okay till maturity, that’s going broke.”
Greg Carroll, CFP®:
Yeah, that’s a tough conversation. It’s not like with stocks, it can move around a lot in price and always do. Bonds are supposed to be pretty steady. On the statement, they don’t move very much.
Steve Wolff:
Right.
Greg Carroll, CFP®:
But they do move, but they do move.
Steve Wolff:
We’re at a timeframe right now, we’ve actually been in a bull market for bonds almost my whole career, since 1986. And actually probably started during 82 or 83-
Greg Carroll, CFP®:
Right.
Steve Wolff:
Where the interest rates were extremely high and coming down. Well, why is that a bull market? Because as interest rates come down, prices on a bond goes up. We’ve talked about this before and some other things. So I’m not going to explain why, but that’s what happens.
Greg Carroll, CFP®:
Yes.
Steve Wolff:
Okay. Now we’re on the other side of that, where interest rates were almost at zero. Now it looks like because of what’s going on here with inflation, the fed is now talking about raising interest rates. Now you’ve got a little bit of a headwind for bonds. So those existing bonds could drop in price again. But they should last to maturity, where you’re going to get your money back.
Greg Carroll, CFP®:
Yes, exactly. So it’s not the same as the company going bankrupt. But yeah, you could see depressed prices for a while until they get close to maturity. So you just want to be aware of that. I mean, if they’re paying a good interest rate and you’re comfortable with that. The bonds highly rated and you’re still going to get it at maturity or your value back, you can hold onto those.
Steve Wolff:
Right. And it always comes down to know what you own.
Greg Carroll, CFP®:
Know what you own.
Steve Wolff:
Know what you own. If you do that, you’ll probably be okay. Look, there’s always something that can happen. All right. There’s not a person I know who’s honest who hasn’t lost money in stocks, for sure, and probably in a bond, too, if they’ve been in there long enough. It happens. You just got to make sure that you know what you own and that’s a good case for diversification.
Greg Carroll, CFP®:
Absolutely.
Steve Wolff:
You wouldn’t want to have everything you own in a Lehman Brothers bond at the time.
Greg Carroll, CFP®:
No.
Steve Wolff:
Okay. That’s another thing too, and this is another topic that we’ll get into with Greg at another Steve Stock Stories, but about concentration risk. Where you have everything in one company or one bond or one thing. That’s where you can get really hurt.
Greg Carroll, CFP®:
Absolutely. Yeah. Was it Peter Lynch said, “Buy what you know.” But you can buy too much of what you know, sometimes. If you’re too concentrated, there’s a big risk there to.
Steve Wolff:
Right. Or if a person works for a particular company and it keeps getting more and more stock options and shares of stock, et cetera. And all of a sudden, that person has 85% of their net worth wrapped up in one company. Those are things we’ll … I don’t want to get too much into that. We are going to talk at that again with Greg because he’s got another good story and that one’s more on stocks than it is on bonds.
Greg Carroll, CFP®:
Yep.
Steve Wolff:
So, anything else you’d like to tell people about what your experiences shown as far as bonds are concerned?
Greg Carroll, CFP®:
I think, what you said earlier, know what you own and if you ever have questions, talk to your financial advisor, your CPA, whoever your advisor is that you’re entrusting to help guide you. You need to ask those questions. Don’t be afraid to ask questions.
Steve Wolff:
Right.
Greg Carroll, CFP®:
Because the more you know, the more you’ll understand different movements in prices of bonds and stocks. And the more comfortable you’ll be able to stay the course.
Steve Wolff:
Right. I know I have some clients who always say, “I know this is probably a stupid question.” If you don’t know the answer to the question, it’s not stupid.
Greg Carroll, CFP®:
Absolutely.
Steve Wolff:
Now if you ask it 10 times, maybe that’s stupid, but-
Greg Carroll, CFP®:
And Steve never counts.
Steve Wolff:
But if you really don’t know the answer, ask us. We’ll be more than happy to tell you.
Greg Carroll, CFP®:
Always happy to repeat it.
Steve Wolff:
So anyway, appreciate it. This is another Steve Stock Story. I’m Steve Wolff, Greg Carroll. We really appreciate you just listening. For those who are seeing this on video, watching us, we’ll see you next time. Thanks. Bye, bye.
What is the biggest myth that the media has told you? Josh Cahan, Catherine Magaña and Steve Wolff dive in to help you understand some of the myths surrounding cryptocurrencies.
__________________________________
FREE Report: 5 Investing Secrets Every Investor Needs to Know Avoid making bad investment decisions, this little-known report reveals 5 better ways to invest in stocks.
WWM Financial is an SEC- Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital. No advice may be rendered by WWM Financial unless a client service agreement is in place.
Learn 5 simple steps to avoid making bad investment decisions.
Steve Wolff is a Managing Partner at WWM Financial in Carlsbad California.
Steve can be reached at 760-692-5190.
Disclaimer
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
WWM Financial is an SEC Registered Investment Advisor. Advisory services are only offered to clients or prospective clients where WWM Financial and its representatives are properly licensed or exempt from licensure. No advice may be rendered by WWM Financial unless a client service agreement is in place.
A Conversation About The 2021 Biden Tax Plan and Federal Tax Proposals
In this episode Catherine and Rachel Ivanovich discuss the 2021 Biden Tax Plan proposals including, the child care tax credit, long term capital gains, tax gains at death, 1031 exchanges and more.
Catherine Magaña is a CFP® or CERTIFIED FINANCIAL PLANNER™ and Managing Partner at WWM Financial in Carlsbad California.
Rachel is the founder and Chief Leadership Officer of Easy Life Management, Inc. She is a business coach, an Enrolled Agent and earned an MBA from San Diego State University with an emphasis in Finance and Taxation in 2010.
Learn 5 simple steps to avoid making bad investment decisions.
WWM Financial is an SEC Registered Investment Advisor.
Transcript of video below:
Catherine:
Welcome to our podcast on financial planning. I’m Catherine Magana, a Certified Financial Planner™ professional. Today, we’re going to focus on an important topic of financial planning, which is tax planning. Tax planning, we really look at financial situations from a tax perspective. We actually want to find an efficient way of using the tax code and look at financial planning, and they really do go hand in hand together. So we thought it was important for us today to cover the 2021 Biden tax plan and federal tax proposals. Even though there are several items that we’re going to talk about today that aren’t even approved yet, we thought it was important to start the conversation and start thinking ahead.
Catherine:
So we’ve collaborated with an enrolled agent and tax strategist, Rachel Ivanovich, with Easy Life Management, for today’s talk. So thank you for joining us. We’re really happy to have you here with us today. Let’s go ahead and get started, and maybe we can talk a little bit about kind of some of the income taxes that may come up with these changes. Any thoughts on that?
Rachel Ivanovich:
Thanks, Catherine.
Catherine:
You’re welcome.
Rachel Ivanovich:
Thanks for having me today. It’s really great to be here. Honestly, like you said, these are proposals.
Catherine:
Yes.
Rachel Ivanovich:
Tax planning, as you said, is a very important topic, and I believe that a lot of people don’t consider this until it’s too late. So given that these are just proposals, I think it’s really important also to differentiate between what has already been enacted and what is potentially coming down the pipeline at us. As you were saying, it’s really hard for us to know, is it going to be next month? Is it going to be six months from now? Is it actually going to be retroactive, if it actually then does take effect before the end of the year? Let’s just have a conversation kind of about what proposals are on the table.
Catherine:
Sure. No, I would agree. I mean, I think you get a lot of calls. I get a lot of calls, and everybody wants to know what should we be doing now.
Rachel Ivanovich:
Absolutely.
Catherine:
I think it is important to cover some areas that are critical or we think that might be servicing. One in particular, I think, that’s come up is kind of the childcare tax credit. I think that’s definitely something that’s-
Rachel Ivanovich:
Absolutely.
Catherine:
… prevalent.
Rachel Ivanovich:
It’s top of mind because the advance payments are starting to roll out this month. It’s July of 2021. People are excited, a little extra cash in their pocket. We’ve been chatting with clients about does it make sense to take the money right now, or does it make sense… Because these are advance payments, and that’s really important to understand, because if you take and receive the payment now, you won’t be able to use that to offset tax next-
Catherine:
Later.
Rachel Ivanovich:
Yeah, next spring.
Catherine:
Oh, okay.
Rachel Ivanovich:
I think that’s a really important factor for people to consider because you can opt out of receiving the advance payments. Why would you do that? I don’t know. Honestly, I think a lot of people want to have the money, and it’s going to stimulate the economy, they say. But at the same time, tax planning is what we’re here to talk about. If you’re thinking… currently for 2021 only, and this is already law, so we’re going to talk about proposed versus actual.
Catherine:
Okay.
Rachel Ivanovich:
In the past, the child tax credit… there are two credits that were kind of on the table here. One is the child and dependent care tax credit, and the other is the actual child tax credit. In the past, the child tax credit was $2,000 per child, and it expired… Basically, you got the tax credit up until the child turns 17. So that’s to differentiate between this new enhanced child tax credit that’s on the table currently for 2021.
Catherine:
Got it.
Rachel Ivanovich:
So in the past, you’d get the $2,000 credit, a portion of which was considered refundable. The other portion is non-refundable. To explain the difference between those two and why it’s important to understand why this is a great feature for the enhanced child tax credit. The refundable credit functions like a payment, whereas a non-refundable credit just reduces tax liability. Oftentimes, you’ll have a tax situation and you’re doing planning. If you’re looking at what your tax liability is, that non-refundable credit would reduce your tax to zero, but then the remaining portion of the credit, if it’s refundable, you’ll actually get a refund.
Catherine:
Oh, okay. Excellent.
Rachel Ivanovich:
Okay? Yeah. There are two different kinds. This new enhanced child tax credit makes it completely refundable, so it’s money in your pocket.
Catherine:
Nice. Definitely good to think about and know. Especially, like you said, down the line, if you’re planning to do your taxes and if you’ve already taken the credit, then you don’t want to do it twice.
Rachel Ivanovich:
Yes, absolutely. You’re looking at the credit, and previously the credit was $2,000 per child. Now the credit is, if your child’s under age six, you’re getting $3,600, which is a great benefit. Then also, the enhanced child tax credit is $3,000, but it’s up until age 17, including age 17. So I think this is a great benefit for families.
Catherine:
Another one that I’ve heard a lot about and it really affects some of the clients that are investing or have properties and investments are there’s a long-term capital gains and dividends being taxed at ordinary income with taxable income over a million dollars. That’s kind of a big deal.
Rachel Ivanovich:
It’s huge. Yeah, it’s huge. Okay, so just to differentiate, this is proposed.
Catherine:
Correct, yes.
Rachel Ivanovich:
Who knows what’s actually going to happen? What I’ve heard is for individuals whose taxable income or income is under $400,000, there will be no changes. That’s a sigh of relief for a lot of people, a lot of families. But if your income is over $400,000 and if you are approaching that million dollar mark, you definitely want to start thinking, “Should I start planning ahead?” Clearly, a lot of clients have called the office who have… they work for a corporation, they receive a large amount of their compensation as stock options. It may be time to diversify. Meet with a financial advisor and really look at your portfolio, and should I sell now?
Catherine:
Well, and some other things I was thinking about is perhaps between now and the end of the year, if it does come into play, then there’s some tax loss harvesting. Are there things that maybe… Are there some losses that you can take?
Rachel Ivanovich:
Absolutely. It’s definitely a really good time to meet with your financial advisor to look at your portfolio. Because, as you were saying, this proposed rate, they’re looking to tax long-term capital gains and qualified dividends as ordinary income. What that translates into is currently there are three long-term capital gain rates or preferential rates. If you hold assets more than a year and a day, then the gains on those assets are taxed at lower rates. Therefore, currently, if you make less than $40,000, which you don’t pay anything. There’s a 0%. If you are up to, I want to say from 40-ish thousand to 446,000, if you’re single, you’re going to be paying 15% on those long-term capital gains and your qualified dividends.
Catherine:
Yikes.
Rachel Ivanovich:
Over that, it’s 20%.
Catherine:
Correct. It’s really those that make over a million that are really going to get dinged on this.
Rachel Ivanovich:
Yes, and really need to start planning and/or thinking about planning. Because the other thing that they’re talking about, they’ve proposed, is bumping the highest tax bracket from 37% up to 39.6%.
Catherine:
Yeah, that’s a big deal.
Rachel Ivanovich:
Yes. It is a big deal. Definitely want to look ahead and… It isn’t law yet, but it’s hard to say what’s going to happen.
Catherine:
Yeah. Another one that comes up a lot is the tax gains at death for unrealized gains. Being above a million dollars, that you’re now going to be taxed.
Rachel Ivanovich:
Yes.
Catherine:
Kind of taking a step back and know that, once again, this is being proposed, so it’s not in effect yet.
Rachel Ivanovich:
Absolutely.
Catherine:
Currently, if somebody gets an inheritance, then there’s a step up in basis, and they can use that step up or the six-month date of death valuation.
Rachel Ivanovich:
It is really important to look at this because they have put this on the table. It’s hard to say if it’s actually going to happen. But currently, as you were saying, the step-up in basis, they are talking about taking that off the table. The step-up in basis is if you hold assets and you bought it for, I don’t know, $5 a stock, and now it’s worth $100 when you pass away, whoever inherits it, their basis or what their investment in it is that date-of-death value. They’re thinking of taking that off the table.
Catherine:
Which is a big deal.
Rachel Ivanovich:
It’s a big deal.
Catherine:
Once again, so the new proposal then is if it’s over a million dollars, then at that point, they’re going to be taxed.
Rachel Ivanovich:
Correct. Then there are a couple of different proposals that I’ve heard, and therefore, that’s why it’s really hard to do the planning and to dig into it. I guess at the end of the day, the question is, well, what should I do now?
Catherine:
Yeah.
Rachel Ivanovich:
As you mentioned previously, tax loss harvesting and really taking a hard look at your portfolio and looking at what is in there. Is it diversified? What can I do based on the current law? Because even though they’re proposing certain things, it doesn’t necessarily mean it’s going to come to fruition. I mean, also they’ve thrown out 1031 exchanges may go away.
Catherine:
Yeah, I saw that or over $500,000.
Rachel Ivanovich:
Correct.
Catherine:
Which is another big deal-
Rachel Ivanovich:
It’s huge.
Catherine:
Because a lot of people have real estate, and they’re doing 1031 exchanges. So once again, here we are.
Rachel Ivanovich:
The question is should I sell? Should I do a 1031? So a 1031, for those of you who aren’t familiar, is if you hold rental real estate and you have appreciated a property and you sell at a gain, you can buy another rental property, which is like-kind… They’re sometimes called like-kind exchanges.
Catherine:
Correct.
Rachel Ivanovich:
It’s been a great tax planning tool for those who own real estate.
Catherine:
A lot of people own real estate-
Rachel Ivanovich:
Yes.
Catherine:
Especially real estate’s gone up so much in value.
Rachel Ivanovich:
Absolutely.
Catherine:
So that’s a really, really big deal.
Rachel Ivanovich:
Yes.
Catherine:
The other thing that kind of comes to mind with some of these potential proposals are revisiting maybe life insurance or your estate plans.
Rachel Ivanovich:
Yes, absolutely.
Catherine:
Those are some areas I think that can be looked at. Perhaps we can talk a little bit about kind of the estate planning aspect of some of the proposals.
Rachel Ivanovich:
Estate planning is definitely a topic that people should be considering right now, even if the proposals that are currently on the table don’t go through the current lifetime exemption. Every individual has what’s called a lifetime exemption, which is $11.7 million. Current law is it will go down at the end, or what they’re saying, the language is it’s going to sunset back to pre Tax Cuts and Jobs Act, which was the end of 2017. It’s supposed to go from $11.7 back down to $5 million. What’s on the table currently is that it’ll even go down further to $3.5 million. Definitely looking at different planning tools and charitable remainder trusts.
Catherine:
I think one of the things that… Yeah, grantor remainder trust.
Rachel Ivanovich:
Exactly.
Catherine:
One of the things that we often see is the annual gifting. So the $15,000 per donee per year, and if you’re married, then you can give-
Rachel Ivanovich:
30.
Catherine:
… up to 30. I think those are some things that may be revisiting.
Rachel Ivanovich:
Those are absolutely huge to consider right now, is to really look at that $15,000 annual exclusion. There’s zero reporting requirements for that. As you mentioned, you can give $15,000 to any one individual. A lot of people should be thinking about 529 accounts, which are a great, great investment tool. They’re governed by gift tax rules, meaning you can put up to $15,000 per individual per year. You don’t have to file a gift tax return for that. So definitely something-
Catherine:
Yeah, 529 plans, especially of those that have grandkids or even kids or want to gift money-
Rachel Ivanovich:
Yes, nieces and nephews.
Catherine:
Yes, and it grows tax deferred-
Rachel Ivanovich:
Tax free.
Catherine:
And it comes out tax free if they use it for education.
Rachel Ivanovich:
Exactly, yeah.
Catherine:
There’s definitely some amazing benefits there.
Rachel Ivanovich:
What I’ve also heard, and I don’t know if this is… Well, clearly proposed. I mean, I’ve heard so many things, but I have heard that large gifts… It may be a good time to be considering larger gifts at this point, because if you look at gift and estate tax planning over the years, you’ll have that lifetime exclusion amount and the gift… Or if you make a large gift, if it is over the $15,000 annual exclusion where there is no reporting requirement, it’ll just carve away from your exclusion. I have heard that those large gifts, that if you give them pre American Family Plan actually being enacted, you may be grandfathered in under the old rules. I do think that’s something to consider if, if you’re thinking about making a large gift to a family member or a child.
Catherine:
I know we talked a lot about the unknowns, and we’re getting a lot of questions, and we do think, yes, we want to plan ahead. I know I’m a planner. You’re a planner.
Rachel Ivanovich:
Yes.
Catherine:
It is hard when we don’t have the actual information or know for sure.
Rachel Ivanovich:
Absolutely.
Catherine:
A lot of things might get retro or grandfathered and we don’t know. In the past, we’ve also seen things get approved last minute, and so I think it’s just being mindful of what’s to come. Are there some things that perhaps you may want to do, maybe along the way as you know things might come down the line? But part of this is also maybe planning, but then waiting to see what comes up.
Rachel Ivanovich:
Absolutely. As we all know, there are certain tools that are already in place that you can use. You can plan for Roth conversions. I think it’s a case-by-case situation. Every individual really wants to look at if you have money in an IRA account, is this a good year to do a conversion?
Catherine:
I absolutely love Roth conversions as well. Once again, it is case by case, but for those that are potentially in some gap years for retirement or collecting Social Security or Medicare and just different things that perhaps you factor that in. I think it is… there is potential ways to reduce your… taxes now than later.
Rachel Ivanovich:
Absolutely. Yeah, and maybe if your businesses is having a down year, it might be a good year to consider that as well, to do that conversion in a year when your income’s a little bit lower.
Catherine:
Is there anything else that we didn’t touch on that maybe-
Rachel Ivanovich:
We didn’t mention the net investment income tax, because that is something that you can plan for. I do think that working with a tax advisor, a tax strategist, working with your financial advisors, because as we were saying, the long-term capital gains rates currently do have that preferential treatment of the lower rates. If that does go up to be taxed as ordinary income, you’re not only looking at the 39.6%, but you’ve also got the additional 3.8 net investment income tax to consider. And if you’re in a high income state, such as California, New York, New Jersey, you may be paying 51% in taxes on long-term capital gains and qualified-
Catherine:
That’s a big change from what we’re used to.
Rachel Ivanovich:
It’s a huge change. If you actually look, that would put the United States as the highest, yes, country in the world for-
Catherine:
For gains?
Rachel Ivanovich:
… for long-term capital gains.
Catherine:
Oh, interesting.
Rachel Ivanovich:
Yeah, it was very interesting for me to see. It’s hard to say what’s going to happen.
Catherine:
Yeah. Well, I thought today we wanted to talk a little bit about tax planning. Once again, doing financial plans, it all goes hand in hand. Rachel, thank you for your time today.
Rachel Ivanovich:
Absolutely. It’s my pleasure.
Catherine:
Is there a way that people can contact you if needed? Do you have a phone number, email or anything?
Rachel Ivanovich:
Absolutely. They can reach out to me at Rachel@elmtax.com or they can call me at my office 760-730-1817.
Catherine:
Great. Well, thank you so much for joining us today. We hope you learned something and it was worthwhile for you. Thank you, and you’ll hear from us again. Thanks.
In this episode: Steve Wolff discusses how excided he is about the investing opportunities in this techno-digital revolution.
Full transcription below:
Steve Wolff:
Hello everyone, this is Steve Wolff with another edition of Steve’s Stock Stories. I’m here with my
cohort, producer and friend Joscelin Magaña.
Joscelin Magaña:
How’s it going everybody?
Steve Wolff:
This is one of my favorite topics. I am so happy to be alive at this point in time, because we are going
through a technological digital revolution. This must be what it felt like to be in the industrial revolution,
when you went from the horse and buggy to cars. Of course, eventually putting men on the moon. But I
mean, all the things that happened in that time are happening now only they’re happening digitally.
Joscelin Magaña:
I feel the same first feeling when I saw the world change in a dramatic way where I was so excited. Two things that I remember surfacing, the mobile phone and the internet.
Steve Wolff:
Oh, yeah.
Joscelin Magaña:
Remember when the movie The Saint came out? That little phone was amazing. He had video on there, he got text messages. I thought, “Oh my gosh, if that could ever possibly happen.” Then we have way better phones than that now, you just throw that little toy away. Right? The other big thing that I saw was the internet. When I was in college, we were just using email at the time. There were these things called websites. I remember thinking, “Wow, we’re going to be able to buy stuff on the internet
someday.” I remember telling somebody, “Hey, this is going to be an amazing space because we’re just
going to be buying stuff on the internet.” And they’re like, “Who’s going to buy stuff on the internet?
You just go to the store. Why the hell are you going to-?” Okay. One technological advanced before this, which kind of wasn’t, but everybody thought was crazy, was when everybody started buying bottled water; but that’s a whole other subject.
Steve Wolff:
Well you talk about phones. I remember watching the movie Wall Street with Michael Douglas and he
had a mobile phone, but it was probably, I don’t know, 12 inches.
Joscelin Magaña:
Oh, yeah. They were big.
Steve Wolff:
They were huge.
Joscelin Magaña:
They were big, like a shoe box.
Steve Wolff:
Right, they were big. You could make a phone call on there today, my goodness, you could do just about everything. You can turn on your car, you can-
Joscelin Magaña:
You can turn on your sprinklers in your house, you can see your front door. It’s amazing.
Steve Wolff:
What they have in that little phone is way more powerful than what IBM first came up with when they had that first computer that took up, I don’t know, three rooms or something. With vacuum tubes and whatever, it’s just incredible.
Joscelin Magaña:
I guess where I’m going with this is that I’m as excited now as I was when mobile phones were becoming more accessible and the whole mobile phone revolution and the internet. I remember my first job we didn’t even have computers on our desks…
